Merryn Somerset Webb
There are always stupid ideas drifting around the political ether. This week is notable for having an awful lot of them. The Labour Party has suggested that the UK should introduce rent controls. Yet rent controls have a long history of making housing both more squalid and less available. They have also suggested that we cancel all PFI contracts and bring the infrastructure they are related to back “in house” – without necessarily paying full compensation.
This is nuts. MoneyWeek has spent years criticising PFI as an insanely expensive, mildly dishonest way to commission mediocre infrastructure – it’s almost up there with the tax-credit regime as Gordon Brown’s worst policy ever. But we also understand the importance of contract law and confidence in private property ownership in underpinning all prosperity, all the time: there is no such thing as a rich country where property and contract law are not respected. So we would never dream of suggesting that any contracts should be cancelled like this. Better to sit them out. The same goes for the UK’s utility companies. Are they a bit rubbish? Yes. Should they be nationalised? We don’t think so. If they are, is it right for the government to pay a price that fails to reflect the value of their revenue streams (or, as John McDonnell says, in a heroic misunderstanding of the word market, for the market price to “be determined by parliament itself”)? Most definitely not.
The fall out from a mix of these policies – or even much more discussion of them – seems pretty obvious. The fall in the pound after the Brexit referendum would look like a blip relative to its collapse after the reading of the first McDonnell budget speech. The cost of borrowing in the UK would rise to an extent that would make any short-term gains from taxing “the rich” meaningless to the UK’s finances. And of course it would fast deliver a nasty dose of inflation, something that one way and another is bad for almost everyone. Too many of you will be thinking that inflation is bad, but that you can hedge yourself using your equity holdings. Don’t be so sure. Look back to the 1970s: lots of inflation and a 70% fall in the UK stockmarket. This weekend, as you read about the Labour conference, you might want to go back and read our cover story from the start of this month on the financial carnage of the 1970s. Then go and buy some more gold. Just in case.
Finally a quick word on disruption. I told you last week to watch out for the big tech companies on the basis that there is huge political risk to all their business plans. The disruptors, I said, would soon be disrupted themselves – by the state. Uber is the latest example of this, but the trend is now advancing fast enough that I am thinking of taking Scottish Mortgage (which has heavy holdings in the likes of Amazon, Facebook and Alphabet as well as far too much in Tesla) out of the MoneyWeek investment trust portfolio. A full update on this will follow in the next few weeks.